Question

Open market operations take place when the

a. central bank buys or sells stocks
b. central bank buys or sells government bonds
c. central bank increases or decreases the discount rate to monitor the money supply
d. central bank increases or decreases reserve requirements for depository institutions
e. commercial banks borrow reserves from the central bank

Answer 1

Open market operations involve the central bank buying or selling government bonds to manage the economy's money supply and interest rates, with the most correct option being b. central bank buys or sells government bonds.

Step-by-step explanation:

Open market operations occur when the central bank buys or sells government securities, particularly U.S. Treasury bonds, to regulate the money supply and influence interest rates. The correct option stating this is: b. central bank buys or sells government bonds.

Through these transactions, the central bank effectively alters the quantity of reserves that banks hold, which in turn affects the federal funds rate—the interest rate for overnight loans between banks. This rate is crucial because it influences other interest rates throughout the economy, including those for savings, mortgages, and loans. Open market operations are the most commonly utilized method of monetary policy to fine-tune the economy.